How much does an annuity cost?

Find out how much an annuity costs, and the various costs you can expect to pay when you purchase an annuity.

4 min read

When investing in annuities, one of the things you have to consider is the cost associated with these investment products. Depending on the type of annuity you purchase, you will pay certain fees, including the premium, expense ratios, and commissions. Before signing the annuity contract, you should learn about the actual cost of the annuity.

The cost of an annuity may average anywhere from 1% to 5% depending on the type of annuity and the investment style you choose. Some of the costs that may be applied to an annuity may include administrative fees, mortality expenses, investment expense ratio, surrender fees, cost of riders, etc.

Annuity fees you can expect to pay

When purchasing an annuity, there are certain annuity fees you can expect to pay. If you are unsure of the fees you will pay, you should ask the annuity provider or your financial advisor before making any decisions.

Administrative fees

Administrative fees cover the cost of managing the annuity, and they vary depending on the annuity provider and type of annuity. These fees can be charged as a flat fee, a percentage of the premium, or a combination of both. Some annuity providers may waive administrative fees for large deposits.

Mortality expenses

An annuity charges a death benefit fee as a guarantee to pay eligible beneficiaries when the annuity owner dies. This fee ranges from 0.5% to 1.5% of the annuity value, and it is applied to variable annuity contracts. It does not apply to fixed annuities.

Investment expense ratio

The annuity provider may use the premiums paid by the annuity owner to invest in various investment options, including mutual funds, stocks, and bonds. These funds charge an expense ratio, which is the cost of administering the funds. The investment expenses are separate from agent commissions, which are usually factored into the interest rate you are given.

Rider costs

Annuities may offer optional benefits, which are additional features that can be added to the annuity contract for an extra fee. Examples of riders may include death benefits, inflation protection, and long-term care coverage. The rider costs can cost 0.25% to 1% of the annuity value per year, but buying more riders will increase the amount the insurance company deducts from your annuity each year.

Surrender charges

When you make a premature withdrawal or cancel an annuity, you will pay a surrender charge, which is calculated as a percentage of the total annuity value. The surrender charge decreases in each year you own the annuity. For example, if the annuity has an 8% surrender charge in the first year, it will decrease by 1% each year until the end of the surrender period. After the surrender period, you can make no-penalty withdrawals from the annuity.

Other fees

There may be additional miscellaneous fees you pay like distribution charges, contract fees, redemption fees, management fees, and transfer charges. Before signing the dotted lines, ask the annuity provider about any fees that come with the annuity contract you are considering investing in.

Annuity cost broken down by type of annuity

As from the general fees associated with annuities, you will encounter additional fees when comparing different types of annuities. In this section, we break down the additional fees based on the type of annuity.

Fixed annuity fees

When you purchase a fixed annuity, you will have a fixed interest rate for a specific period. You will receive a guaranteed rate of return for the term you choose. As a result, fixed annuities have the lowest fees, and mainly comprise commission expenses and surrender charges.

Additionally, fixed deferred annuities tend to have lower fees than immediate annuities, variable annuities, and fixed-indexed annuities.

Fixed indexed annuity fees

Fixed-indexed annuities let you choose specific market index performances such as the S&P 500 that will be used to determine the amount of interest that will be credited to your annuity.

If the markets do well, your investments have the potential to grow. However, if the market performs poorly, you may have reduced or no earnings. While fixed-indexed annuities do not have up-front sales fees, they may carry surrender fees and other hidden costs. You should also consider the margin fee, which allows the annuity provider to manage the balance between risk and return.

Variable annuity fees

Unlike fixed annuities that have a fixed interest rate, variable annuities still earn interest, but the rate of return is subject to change depending on the performance of the underlying investments. The annuity owner is only assured of receiving the initial amount of principal they paid, but the return on investments is not guaranteed.

A variable annuity has higher costs than a fixed annuity, since the annuity provider has to compensate for the higher degree of risk they are taking. Hence, a variable annuity may have higher fees across all levels, including commission fees, mortality, expense ratio, and riders.

Single-Premium Immediate Annuity

This annuity is ideal for retirees who want to supplement their retirement income immediately. An annuity owner pays a lump sum upfront payment to purchase a single-premium immediate annuity, and they can start receiving an income as soon as possible to help them meet their retirement expenses.

This type of annuity has low annual expenses, usually averaging 1% to 5%, since the insurance company invests the amount deposited. Additionally, the fees you incur depend on the investment strategies you choose.

Is an annuity a good investment?

Whether an annuity is a good investment or not depends on your financial goals and financial situation. Generally, an annuity provides a guaranteed stream of income over time, often during retirement. Like other investment products, an annuity has various pros and cons.

One advantage of annuities is that they pay a guaranteed stream of income to annuitants, which is attractive to retirees looking for a predictable source of income. Annuitants enjoy tax-deferred growth, meaning that they won't pay income taxes on any gains until when they withdraw the money.

On the downside, annuities have hidden fees that may reduce the returns you generate. These costs may include commissions, administrative expenses, surrender charges, etc. Additionally, annuities have limited liquidity, and you may not be able to access your funds at any time, or when you have an emergency. You will have to pay a penalty to make a premature withdrawal or cancel the annuity contract.

When deciding whether an annuity is a good product to invest in, you should also consider your financial goals and risk tolerance. You should read the annuity contract and ask the annuity provider any questions you might have.